UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED October 2, 1999
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-5680
BURKE MILLS, INC.
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-0506342
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
191 Sterling Street, N.W.
Valdese, North Carolina 28690
(Address of principal executive offices) (Zip Code)
(828) 874-6341
(Registrant's telephone number, including area code)
No Changes
(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the registrant 1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days. Yes X No _____
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the numberof shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date. As of November
5, 1999, there were outstanding 2,741,168 shares of the issuer's only class
of common stock.
Page 1 of 20
BURKE MILLS, INC.
INDEX
PART 1 - FINANCIAL INFORMATION Page Number
Item 1 - Financial Statements
- -----------------------------
Condensed Balance Sheets:
October 2, 1999, and January 2, 1999 3
Condensed Statements of Operations and Retained Earnings:
Thirteen Weeks Ended October 2, 1999 and October 3, 1998
Thirty-nine Weeks Ended October 2, 1999 and October 3, 1998 4
Statements of Cash Flows:
Thirty-nine Weeks Ended October 2, 1999 and October 3, 1998 5
Notes to Condensed Financial Statements 6
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results of Operations 12
- ---------------------------------------------------------
Part II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 18
Item 6(a)- Exhibit 27 - Financial Data Schedule 19
-----------------------------------------------
SIGNATURES 20
Page 2
BURKE MILLS, INC.
CONDENSED BALANCE SHEETS
October 2, January 2,
1999 1999
(Unaudited) (Note A)
----------- --------
ASSETS
Current Assets
Cash and cash equivalents $ 1,949,048 $ 3,384,439
Accounts receivable 5,157,706 3,460,307
Inventories 4,210,006 3,705,849
Prepaid expenses, taxes and other
current assets 513,411 313,872
Deferred income taxes 239,970 349,000
--------- ----------
Total Current Assets $12,070,141 $11,213,467
----------- -----------
Equity Investment in Affiliate 423,523 405,623
------- -------
Property, Plant and Equipment - at cost 31,095,081 28,478,700
Less: Accumulated depreciation 15,823,733 15,869,275
----------- ----------
Property, Plant and Equipment - Net 15,271,348 12,609,425
----------- ----------
Other Assets
Deferred Charges & Other Non Current 118,748 167,077
------- -------
Total Assets $27,883,760 $24,395,592
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt $ 849,714 $ 750,000
Accounts payable 4,415,263 2,303,876
Accrued salaries, wages and vacation pay 450,852 160,862
Other liabilities and accrued expenses 268,959 137,096
Income taxes payable --- 31,600
---------- ----------
Total Current Liabilities $ 5,984,788 $ 3,383,434
Long-term Debt 5,296,286 4,562,500
Deferred Income Taxes 2,179,836 2,220,836
---------- ----------
Total Liabilities $13,460,91o $10,166,770
----------- -----------
Shareholders' Equity
Common stock, no par value(stated value, $.66)
Authorized - 5,000,000 shares
Issued and outstanding -2,741,168 shares 1,809,171 1,809,171
Paid-in capital 3,111,349 3,111,349
Retained earnings 9,502,330 9,308,302
--------- ---------
Total Shareholders' Equity 14,422,850 14,228,822
---------- ----------
Total Liabilities & Shareholders' Equity $27,883,760 $24,395,592
=========== ===========
Note A: The January 2, 1999, Condensed Balance Sheet has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required for generally accepted accounting principles
for complete financial statements.
See notes to condensed financial statements.
Page 3
BURKE MILLS, INC.
CONDENSED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(Unaudited)
Thirteen Weeks Ended Thirty-Nine Weeks Ended
-------------------- -----------------------
October 2, October 3, October 2, October 3,
1999 1998 1999 1998
-------- -------- -------- --------
Net Sales $11,625,189 $11,509,188 $32,416,882 $32,181,297
- --------- ----------- ----------- ----------- -----------
Cost and Expenses
Cost of Sales 10,105,347 9,976,035 28,606,839 28,419,391
Selling, General and
Administrative Expenses 1,182,970 737,008 3,291,930 2,136,703
Factor's Charges 47,375 46,447 120,077 138,017
-------- -------- -------- --------
Total Costs and Expenses 11,335,692 10,759,490 32,018,846 30,694,111
---------- ---------- ---------- ----------
Operating Earnings 289,497 749,698 398,036 1,487,186
-------- -------- -------- --------
Other Income
Interest Income 13,814 41,886 62,802 136,902
Gain (Loss)on
Disposal of Property --- (1,237) 224,740 (1,237)
Other, net 9,208 --- 11,837 ---
------- ------- ------- -------
Total 23,022 40,649 299,379 135,665
------ ------ ------- -------
Other Expenses
Interest Expense 109,991 114,445 315,659 352,822
Other, net 31,082 30,753 94,036 91,575
------- ------- ------- -------
Total 141,073 145,198 409,695 444,397
------- ------- ------- -------
Income before Provision for
Income Taxes and Equity in Net
Earnings (Loss) of Affiliate 171,446 645,149 287,720 1,178,454
Provision for Income Taxes 61,054 252,500 111,592 471,289
------- ------- ------- -------
Income before Equity in Net
Earnings (Loss) of Affiliate 110,392 392,649 176,128 707,165
Equity in Net Earnings (Losses)
of Affiliate (82,000) 1,500 17,900 202,100
------- ------- ------ -------
Net Income 28,392 394,149 194,028 909,265
Retained Earnings at Beginning
of Period $9,473,938 $9,034,174 $9,308,302 $8,519,058
---------- ---------- ---------- ----------
Retained Earnings at End
of Period $9,502,330 $9,428,323 $9,502,330 $9,428,323
========== ========== ========== ==========
Earnings Per Share $ .01 $ .14 $ .07 $ .33
========== ========== ========== ==========
Dividends Per Share of
Common Stock None None None None
========== ========== ========== ==========
Weighted Average Common
Shares Outstanding 2,741,168 2,741,168 2,741,168 2,741,168
========== ========== ========== ==========
See notes to condensed financial statements.
Page 4
BURKE MILLS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Thirty-Nine Weeks Ended
----------------------
October 2, October 3,
1999 1998
---- ----
Cash flows from operating activities:
Net income $ 194,028 $ 909,265
--------- ---------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 1,397,387 1,220,817
Equity in earnings of affiliate (17,900) (202,100)
(Gain) Loss on disposal of
property assets (224,740) 1,237
Provision for deferred income taxes 68,030 412,300
Changes in assets and liabilities:
Accounts receivable (1,697,399) (1,554,525)
Inventories (504,157) (1,579,948)
Prepaid expenses, taxes and other
current assets (199,539) (164,735)
Income taxes payable (31,600) ---
Other non-current assets 48,329 31,754
Accounts payable 2,111,387 1,211,065
Accrued salaries, wages and vacation pay 289,990 184,521
Other liabilities and accrued expenses 131,863 (135,659)
------- --------
Total Adjustments 1,371,651 (575,273)
-------- --------
Net cash provided by operating activities 1,565,679 333,992
--------- ---------
Cash flows from investing activities:
Acquisition of property, plant and
equipment (4,359,263) (1,050,280)
Proceeds from sale of equipment 524,693 0
--------- ---------
Net cash (used) by investing activities (3,834,570) (1,050,280)
--------- ---------
Cash flows from financing activities:
Principal payments of long-term debt (562,500) (500,000)
Proceeds from bank note 1,396,000 0
--------- ---------
Net cash provided (used)
by financing activities 833,500 (500,000)
--------- ---------
Net (decrease) in cash and cash
equivalents (1,435,391) (1,216,288)
Cash and cash equivalents at
beginning of year 3,384,439 4,306,540
--------- ---------
CASH AND EQUIVALENTS AT END OF
THE THIRD QUARTER $1,949,048 $3,090,252
========== ==========
See notes to condensed financial statements.
Page 5
BURKE MILLS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
- ------------------------------
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all necessary adjustments (consisting
of normal recurring accruals)considered necessary for a fair presentation have
been included. Operating results for the thirty-nine week period ended October
2, 1999 are not necessarily indicative of the results that may be expected for
the year ended January 1, 2000. For further information, refer to the financial
statements and footnotes thereto included in the Company's annual report on Form
10-K for the year ended January 2, 1999.
NOTE 2 - STATEMENTS OF CASH FLOWS
- ---------------------------------
For the purposes of the statements of cash flows, the Company considers
cash on hand, deposits in banks, interest bearing demand matured funds on
deposit with factor, and all highly liquid debt instruments with a maturity of
three months or less when purchased as cash and cash equivalents.
FASB No. 95 requires that the following supplemental disclosures to the
statements of cash flows be provided in related disclosures. Cash paid for
interest for the thirty-nine weeks ended October 2, 1999 and October 3, 1998 was
$322,000 and $358,000, respectively. Income taxes paid during the thirty-nine
week period ended October 2, 1999 and October 3, 1998 were $40,698 and $25,000
respectively.
NOTE 3 - OPERATIONS OF THE COMPANY
- ----------------------------------
The Company is engaged in twisting, texturing, winding, dyeing, processing
and selling of filament, novelty and spun yarns, and in the dyeing and
processing of these yarns for others on a commission basis.
The Company's fiscal year is the 52 or 53 week period ending on the
Saturday nearest to December 31. Its fiscal quarters also end on the Saturday
nearest to the end of the calendar quarter.
NOTE 4 - USE OF ESTIMATES
- -------------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
Page 6
BURKE MILLS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)(Continued)
NOTE 5 - ACCOUNTS RECEIVABLE
Accounts receivable are comprised of the following:
October 2, January 2,
1999 1999
---- ----
Account current - Factor:
Due from Factor on regular
factoring account........ $3,670,000 $2,864,000
Non-factored accounts
receivable............... 1,488,000 596,000
--------- ----------
$5,158,000 $3,460,000
========== ==========
NOTE 6 - INVENTORIES
Inventories are summarized as follows:
October 2, January 2,
1999 1999
---- ----
Finished and in process.... $2,431,000 $2,409,000
Raw materials.............. 1,285,000 728,000
Dyes and chemicals......... 367,000 413,000
Other...................... 127,000 156,000
--------- ---------
$4,210,000 $3,706,000
========== ==========
NOTE 7 - LINE OF CREDIT
- -----------------------
Pursuant to a loan agreement dated March 29, 1996, and amended October 12,
1998, the Company secured an Equipment Loan facility of $2,000,000 and a
$1,250,000 Letter of Credit facility. The Equipment Loan shall be evidenced by
the Equipment Note, and shall bear interest at a rate that varies with the LIBOR
rate. The Equipment Note would be payable in 84 installments. At October 2,
1999, the Company had borrowed $1,396,000 under this line of credit.
The Company plans to draw the remainder of the $2,000,000 between October
and December 31, 1999 to finance equipment purchases.
Also under the Company's factoring arrangement, the Company may borrow from
the factor up to 90% of the face amount of each account sold to the factor. As
of October 2, 1999, the Company had no borrowings from its factor.
NOTE 8 - LONG-TERM DEBT
- -----------------------
On March 29, 1996, the Company entered into a loan agreement with its bank
providing for a term loan of $6,000,000. The new term loan refinanced the two
formerly existing term loans, and accordingly, all term obligations were
consolidated into the one $6,000,000 obligation. This new loan is secured by (1)
a first Deed of Trust on property and buildings located at the Company's
manufacturing sites in North Carolina, (2) a first lien position on the new
equipment and machinery installed at these manufacturing sites and (3) a first
lien position on the existing machinery and equipment located at the Company's
manufacturing sites.
Page 7
BURKE MILLS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
Unaudited)(Continued)
NOTE 8 - LONG-TERM DEBT (cont.)
- -------------------------------
Under the term loan agreement, interest only was payable monthly until
February 1998. Thereafter, principal maturities are payable in the amount of
$62,500 per month for ninety-six (96) consecutive months plus interest at the
floating LIBOR rate plus 1.90%.
Among other things, covenants include a debt service coverage ratio, a
limit on annual property asset acquisitions exclusive of property acquired with
the loan proceeds under this new loan agreement, the retirement or acquisition
of the Company's capital stock in excess of a stated amount, the maintenance of
a minimum tangible net worth which shall increase by a stated amount annually, a
minimum quick ratio, and a maximum debt to tangible net worth ratio.
The annual principal maturities of long-term debt at October 2, 1999 are as
follows:
Current portion $ 750,000
2000/2001 750,000
2001/2002 750,000
2002/2003 750,000
2003/2004 750,000
Thereafter 1,000,000 4,000,000
--------- ---------
$4,750,000
Under the loan agreement, the Equipment Line of Credit will be converted to
a long-term note payable in 84 installments. The Company plans to convert the
Line of Credit and begin installments in April 2000.
The annual principal maturities of this long-term debt at October 2, 1999,
based on the current amount owned are as follows:
Current Portion $ 99,714
2000/2001 $ 199,429
2001/2002 199,429
2002/2003 199,429
2003/2004 199,429
Thereafter 498,570 1,296,286
------- ---------
$1,396,000
Page 8
BURKE MILLS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)(Continued)
NOTE 9 - INCOME TAXES
- ---------------------
The Company uses the liability method as required by FASB statement 109
"Accounting for Income Taxes". Under this method, deferred tax assets and
liabilities are determined based on the differences between financial reporting
and tax bases of assets and liabilities and are measured using the enacted tax
rates and laws.
The items which comprise deferred tax assets and liabilities are as follows:
October 2, January 2,
1999 1999
---- ----
Deferred Tax Assets:
Alternative minimum taxes paid $ 239,970 $ 349,000
========== ===========
Deferred Tax Liabilities:
Accelerated depreciation
for tax purposes $2,160,400 $2,202,300
Undistributed earnings of foreign
affiliate, net of tax credit 13,600 12,700
Other 5,836 5,836
--------- ---------
$2,179,836 $2,220,836
========== ==========
Thirty-Nine Weeks Ended
--------------------
October 2, October 3,
Provision for income taxes 1999 1998
---- ----
consists of:
Deferred $ 68,030 $ 412,300
Federal 22,702 18,300
State 20,860 40,689
--------- ----------
$ 111,592 $ 471,289
========= ==========
NOTE 10 - EMPLOYEE BENEFIT PLAN
- -------------------------------
The Company is a participating employer in the Burke Mills, Inc., Savings
and Retirement Plan and Trust that has been qualified under Section 401(k) of
the Internal Revenue Code. This plan allows eligible employees to contribute a
salary reduction amount of not less than 1% nor greater than 25% of the
employee's salary but not to exceed dollar limits set by law. The employer may
make a discretionary contribution for each employee out of current net profits
or accumulated net profits in an amount the employer may from time to time deem
advisable. No provision was made for a discretionary contribution for the
periods ended October 2, 1999 and October 3, 1998.
Page 9
BURKE MILLS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)(Continued)
NOTE 11 - CONCENTRATIONS OF CREDIT RISK
- ---------------------------------------
Financial instruments that potentially subject the Company to concentration
of credit risk consist principally of occasional temporary cash investments and
amounts due from the factor on receivables sold to the factor on a non-recourse
basis. The receivables sold to the factor during a month generally have a
maturity date on the 20th to the 30th of the following month. At October 2,
1999, the Company had $3,670,000 due from its factor of which $3,098,000 matured
on October 29, 1999. Upon maturity, the funds are automatically transferred by
the factor to the Company's bank.
NOTE 12 - COMMITMENTS
- ---------------------
a) The Company entered into a supply agreement, dated November 23, 1996,
with its joint venture company, Fytek, S.A. de C.V. to purchase twisted yarns.
The Company agrees to purchase approximately $1,800,000 of twisted yarn annually
for the five years beginning November 1997.
b) The Company entered into a supply agreement, dated November 19, 1996,
with Fibras Quimicas, S.A. to purchase yarn. The Company agrees to purchase yarn
based on the schedule below, beginning February 1, 1997, for a five year period.
Year 1 Approximately $2,600,000
Year 2 Approximately $6,400,000
Year 3 Approximately $7,100,000
Year 4 Approximately $7,700,000
Year 5 Approximately $7,700,000
c) The Company and Titan Textile Company, Inc., signed an agreement which
became effective April 1, 1999, whereby the Company sold its friction texturing
equipment to Titan and in turn will purchase textured yarns from Titan. The
agreement states that the Company will purchase 70,000 pounds per week as long
as the Company has a requirement for textured yarns. When the Company's
requirements exceeds 140,000 pounds per week, the Company will purchase at least
50% of its requirements from Titan. The textured yarn pricing structure will be
reviewed every six months and when POY prices increase or decrease by 5% or
more.
d) During 1996 in connection with a bank loan to the Company secured by
real estate, the Company had a Phase I Environmental Site Assessment conducted
on its property. The assessment indicated the presence of a contaminant in the
groundwater under the Company's property. The contaminant was a solvent used by
the Company in the past but no longer used. The contamination was reported to
the North Carolina Department of Environment and Natural Resources (DENR). DENR
required a Comprehensive Site Assessment that has been completed. The Company's
outside engineering firm conducted testing and prepared a Corrective Action Plan
that was submitted to DENR. The Company has identified remediation issues and is
moving toward a solution of natural attenuation. The Company believes it has
made an adequate provision to earnings in 1997 to cover any future cost. No
provision was made in 1998 or 1999. This situation will have no material impact
on the capital expenditures, earnings or competitive position of the Company.
Page 10
BURKE MILLS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)(Continued)
NOTE 13 - INVESTMENT IN AFFILIATE AND RELATED PARTY
TRANSACTIONS
- ----------------------------------------------------------------
The company owns 49.8% of Fytek, S.A. de C.V. (Fytek), a Mexican
corporation. The company accounts for the ownership using the equity method.
During the thirty-nine weeks, the Company had purchases from Fytek of $1,153,000
compared to $1,235,000 in 1998. The Company has a receivable with Fytek of
$48,000 for equipment sold and leased to Fytek which will be paid in the first
quarter of 2000. The Company owes Fytek $112,000 for the purchase of twisted
yarns.
NOTE 14 - ACCOUNTING FOR POSSIBLE IMPAIRMENT OF LONG-LIVED ASSETS
- -----------------------------------------------------------------
In 1995 the Financial Accounting Standards Board issued Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of", which requires impairment losses to be recorded on long-lived
assets used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets carrying amount. Statement No. 121 also addresses the accounting for
long-lived assets that are expected to be disposed of. The Company adopted
Statement No. 121 in the first quarter of 1996 and such adoption did not have
any material effect on the financial statements for 1998 or for the thirty-nine
weeks ended October 2, 1999.
NOTE 15 - EARNINGS PER SHARE
- ----------------------------
Earnings per share are based on the net income divided by the weighted
average number of common shares outstanding during the thirteen and thirty-nine
week periods ended October 2, 1999, and October 3, 1998.
Page 11
BURKE MILLS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
- ---------------------
1999 Compared to 1998
The following discussion should be read in conjunction with the information
set forth under the Financial Statements and Notes thereto included elsewhere in
the 10-Q.
RESULTS OF OPERATIONS
The following table sets forth operating data of the Company as a
percentage of net sales for the periods indicated below:
Thirteen Weeks Thirty-Nine Weeks
Ended Ended
-------------------- -------------------
Oct. 2, Oct. 3, Oct. 2, Oct. 3,
1999 1998 1999 1998
---- ---- ---- ----
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of Sales 86.9 86.6 88.2 88.3
---- ---- ---- ----
Gross Profit 13.1 13.4 11.8 11.7
Selling, General, Administrative
and Factoring Costs 10.6 6.8 10.5 7.1
---- ---- ---- ----
Operating Earnings 2.5 6.6 1.3 4.6
Interest (Expense) (0.9) (1.0) (1.0) (1.1)
Other Income - net (0.1) 0.0 0.6 0.2
---- ---- ---- ----
Income before Income Taxes 1.5 5.6 0.9 3.7
Equity in Net Earnings
of Affiliate (0.7) 0.0 0.0 0.6
Income Taxes Provision (Credit) 0.5 2.2 0.3 1.5
--- --- --- ---
Net Income 0.3% 3.4% 0.6% 2.8%
====== ====== ====== ======
THIRTEEN WEEKS ENDED October 2, 1999
COMPARED TO THIRTEEN WEEKS ENDED October 3, 1998
Net Sales
- ---------
Net sales for the thirteen weeks ended October 2, 1999, increased by 1.0%
to $11,625,000 compared to $11,509,000 for the similar period of 1998. The
increase in sales was primarily due to new products introduced in 1998. The
Company had one less shipping week in 1999 as its fourth of July vacation
shutdown occurred in the third quarter in 1999 and in the second quarter in
1998.
Cost of Sales and Gross Margin
- ------------------------------
Cost of sales for the thirteen weeks of 1999 increased by 1.3% on a sales
increase of 1.0%.
Material cost decreased by 8.6%, but was more than offset by an increase in
labor, overhead and freight cost of 22.1%. The increase in the labor, overhead
Page 12
BURKE MILLS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
Cost of Sales and Gross Margin (continued)
- ------------------------------
and freight cost was primarily a result of the start up of the new ERP software,
and the installation and start up of new dyehouse equipment which replaced a
portion of older equipment.
As a result of an increase in sales of 1.0% and an increase in cost of
sales of 1.3%, gross margins decreased to 13.1% compared to 13.4% in 1998.
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general, and administrative expenses for the third quarter of 1999
increased to $1,183,000 compared to $737,008 in 1998. The increase is primarily
due to the cost of $481,000 related to training, data conversion and start up of
the Company's new ERP software.
Factor's Charges
- ----------------
Factor's charges as a percentage of sales were .4% in 1999 and 1998. The
percentages of sales factored for the two periods were approximately the same.
Interest Expense
- ----------------
Interest expense decreased by $4,000 as compared to 1998 as a result of a
lower average long-term debt.
Interest Income
- ---------------
Interest income for the third quarter of 1999 decreased due to a decrease
in average funds invested.
Equity in Net Earnings (Loss) of Affiliate
- -------------------------------------------
The Company recorded a $82,000 loss from Fytek, S.A. De C.V., its joint
venture in Mexico. The Company's share of net earnings and losses is 50%. Fytek
began operations in the fourth quarter of 1997.
Income before Provision for Income Taxes
- ----------------------------------------
For the thirteen weeks ended October 2, 1999 income before provision for
income taxes decreased primarily as a result of higher cost of sales and cost
related to the Company's new software.
Provision for Income Taxes
- --------------------------
The Company recorded a provision for income taxes of $61,000 for the third
quarter of 1999, compared to a provision of $253,000 in 1998.
Page 13
BURKE MILLS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Continued)
THIRTY-NINE WEEKS ENDED OCTOBER 2, 1999 COMPARED TO
THIRTY-NINE WEEKS ENDED OCTOBER 3, 1998
1999 Compared to 1998
Net Sales
- ---------
Net sales for the thirty-nine weeks ended October 2, 1999, increased by
$236,000, or .7%. The increase in sales is primarily due to the new products
introduced in 1998.
Cost of Sales and Gross Margin
- ------------------------------
Cost of goods sold increased by .7% on a sales increase of .7%. Material
cost declined by 7.5%, but was offset by an 11.8% increase in labor, overhead
and freight costs. The increase in labor, overhead and freight costs was
primarily the result of the installation and start-up of the new ERP software,
and the installation and start-up of new dyehouse equipment which replaced a
portion of older equipment.
As a result of a net sales increase of .7% and an increase in cost of sales
of .7%, the gross margin was 11.75% in 1999 and 11.69% in 1998.
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative expenses increased by $1,155,000 as
compared to 1998. The primary reason for the increase was $1,121,000 of cost
related to the implementation of the Company's new ERP software.
Factor's Charges
- ----------------
Factor charges for both thirty-nine week periods in 1999 and 1998 as a
percentage of sales was .4%.
Interest Expense
- ----------------
Interest expense for the thirty-nine weeks of 1999 decreased by $37,000 as
a result of a lower average long-term debt.
Interest Income
- ---------------
Interest income decreased by $74,000 for the three quarters of 1999, as a
result of a decrease in average funds invested.
Gain on Disposal of Equipment
- -----------------------------
During the thirty-nine week period the Company sold its friction texturing
equipment, which had a gross value of $1,342,000 and a net book value of
$230,000 for $446,000 (also see Note 12 Commitments), resulting in a gain on
disposal of $216,000.
Also, the Company replaced dyeing equipment with a gross value of $86,000
and a net book value of $26,000, resulting in a loss on disposal of $26,000.
These were the major transactions which netted a gain on disposal of
equipment.
Page 14
BURKE MILLS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
Equity in Net Earnings of Affiliate
- -----------------------------------
The Company recorded $18,000 as earnings from Fytek, S.A. De C.V., its
joint venture in Mexico, after recording an $82,000 loss for the third quarter
of 1999. The Company's share of net earnings and losses is 50%. Fytek began
operations in the fourth quarter of 1997.
Income before Provision for Income Taxes
- ----------------------------------------
For the thirty-nine weeks ended October 2, 1999, income before provision
for income taxes decreased primarily as a result of costs associated with the
implementation of the Company's new ERP software and the installation and
start-up of new dyeing equipment as described above.
Provision for Income Taxes
- --------------------------
The Company recorded a provision for taxes of $112,000 for the thirty-nine
weeks of 1999, compared to $471,000 for 1998.
Liquidity and Capital Resources
- -------------------------------
The Company sells a substantial portion of its accounts receivable to a
commercial factor so that the factor assumes the credit risk for these accounts
and effects the collection of the receivables. As of October 2, 1999, the
Company had $3,670,000 due from its factor of which $3,098,000 matured on
October 29, 1999. The Company has the right to borrow up to 90% of the face
amount of each account sold to the factor.
The Company has an equipment line of credit from its bank and under which
the Company may borrow up to $2,000,000 for the acquisition of production
machinery. The amounts borrowed under the credit line is to be converted to a
note payable in eighty-four (84) equal monthly installments plus accrued
interest. The Company has borrowed $1,396,000 under this line of credit as of
October 2, 1999.
The Company's working capital at October 2, 1999, aggregated $6,085,000
representing a working capital ratio of 2.0 to 1 compared with a working capital
of $7,830,000 at January 2, 1999, and a working capital ratio of 3.3 to 1.
The Company's working capital ratio decreased as a result of an increase in
accounts payable for equipment purchases. The Company has open Letters of Credit
for $2,311,000 which are payable between October 8, 1999, and January 3, 2000.
The Company will use its $2,000,000 equipment line of credit to fund the Letter
of Credit requirement. The Company has borrowed $1,396,000 on the Line of Credit
and will utilize the remainder by year-end.
As a measure of current liquidity, the Company's quick position (cash, cash
equivalents and receivables over current liabilities) discloses the following at
October 2, 1999:
Cash, cash equivalents and receivables........... $7,107,000
Current liabilities.............................. 5,985,000
---------
Excess of quick assets to current liabilities... $1,122,000
The Company believes that its cash, cash equivalents and receivables, and
its factoring and credit arrangements will be sufficient to finance its
operations for the next 12 months.
Page 15
BURKE MILLS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Continued)
Liquidity and Capital Resources (Continued)
- -------------------------------------------
The results of operations of the Company for the periods discussed have not
been significantly affected by inflation.
During the thirty-nine weeks of 1999, the Company acquired and made
deposits on new machinery and equipment of approximately $4,359,000 as set forth
in the accompanying statement of cash flows. For the balance of 1999, the
Company anticipates the acquisition of machinery and equipment of approximately
$700,000 which, together with the acquisitions and deposits on acquisitions
incurred to October 2, 1999, will aggregate an anticipated acquisition of new
machinery of approximately $5,0059,000 in 1999. The Company plans to finance its
capital from cash provided from operations and bank financing.
The Company's cash and equivalents decreased for the thirty-nine weeks
ended October 2, 1999, to $1,949,000 from $3,384,000 at January 2, 1999. This
resulted primarily from increases in accounts receivable and inventory
aggregating $2,202,000, acquisitions of equipment and deposits of $4,359,000,
and payments of long-term debt of $563,000, offset partially by increased
accounts payable of $2,111,000, and proceeds from a bank note of $1,396,000 and
proceeds of $525,000 from sale of equipment.
Year 2000 Compliance
- --------------------
On May 29, 1999, the Company began using a new fully integrated system that
replaced its manufacturing and accounting software. The new software was
installed to improve the Company information efficiencies and bring the Company
into compliance for all critical applications affected by the year 2000.
The Company's critical applications including order entry, inventory,
production tracking, production planning, shipping, invoicing, and all
accounting functions are year 2000 compliant. The effect on earnings for the
first three quarters of 1999 is $1,121,000 for training and data conversion. The
Company estimates another $300,000 will be spent in 1999 for report
modifications, additional training, and enhancements.
The cost to bring the existing software into compliance for year 2000 is
not known as the Company planned to replace the software.
The Company has initiated discussions with its significant suppliers, large
customers and financial institutions to ensure that those parties have
appropriate plans to remedy year 2000 issues where their systems interface with
the Company's systems or otherwise impact its operations. The Company will
assess the extent to which its operations are vulnerable should those
organizations fail to remedy properly their computer systems. While the Company
believes its planning efforts are adequate to address its Year 2000 concerns,
there can be no guarantee that the systems of other companies on which the
Company's systems and operations rely, will be converted on a timely basis and
will not have a material effect on the Company. The Company has alternate or
substitute sources for major raw material, gas, and fuel oil.
The Company believes the worst case scenario would occur if the Company's
electrical utilities were interrupted. The Company has no alternate source or
substitute for electricity, and any interruption would materially affect the
Company.
Page 16
BURKE MILLS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Continued)
Forward Looking Statements
- --------------------------
Certain statements in this Management's Discussion and Analysis of
Financial Condition and Results of Operations, and other sections of this
report, contain forward-looking statements within the meaning of federal
securities laws about the Company's financial condition and results of
operations that are based on management's current expectations, beliefs,
assumptions, estimates and projections about the markets in which the Company
operates. Words such as "expects", "anticipates", "believes", "estimates",
variations of such words and other similar expressions are intended to identify
such forward-looking statements. These statements are not guarantees of future
performance and involve certain risks, uncertainties and assumptions that are
difficult to predict. Therefore, actual outcomes and results may differ
materially from what is expressed or forecasted in, or implied by, such
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which reflect management's judgement only as
of the date hereof. The Company undertakes no obligations to update publicly any
of these forward-looking statements to reflect new information, future events or
otherwise.
Factors that may cause actual outcome and results to differ materially from
those expressed in, or implied by, these forward-looking statements include, but
are not necessarily limited to, availability, sourcing and pricing of raw
materials, pressures on sales prices due to competition and economic conditions,
reliance on and financial viability of significant customers, technological
advancements, employee relations, changes in construction spending and capital
equipment expenditures (including those related to unforeseen acquisition
opportunities), the timely completion of construction and expansion projects
planned or in process, continued availability of financial resources through
financing arrangements and operations, negotiations of new or modifications of
existing contracts for asset management and for property and equipment
construction and acquisition, regulations governing tax laws, other governmental
and authoritative bodies, policies and legislation, and proceeds received from
the sale of assets held for disposal. In addition to these representative
factors, forward-looking statements could be impacted by general domestic and
international economic and industry conditions in the markets where the Company
competes; such as, changes in currency exchange rates, interest and inflation
rates, recession and other economic and political factors over which the Company
has no control.
Page 17
BURKE MILLS, INC.PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on 8-K
(a) Exhibits - Financial Data Schedule
(b) Reports on Form 8-K - No report on Form 8-K has been filed
during the thirteen weeks ended October 2, 1999.
Page 18
BURKE MILLS, INC.
Financial Data Schedule
Pursuant to Item 601(c) of Regulation S-K
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE FINANCIAL STATEMENTS INCLUDED IN THE QUARTERLY REPORT
ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS
FOR THE THIRTY-NINE WEEKS ENDED OCTOBER 2, 1998
ITEM NUMBER ITEM DESCRIPTION AMOUNT
5-02(1) Cash and cash items $ 1,949,048
5-02(2) Marketable securities 0
5-02(3)(a)(1) Notes and accounts receivable - trade 5,157,706
5-02(4) Allowances for doubtful accounts 0
5-02(6) Inventory 4,210,006
5-02(9) Total current assets 12,070,141
5-02(13) Property, plant and equipment 31,095,081
5-02(14) Accumulated depreciation 15,823,733
5-02(18) Total assets 27,883,760
5-02(21) Total current liabilities 5,984,788
5-02(22) Bonds, mortgages and similar debt 5,296,286
5-02(28) Preferred stock- mandatory redemption 0
5-02(29) Preferred stock-no mandatory redemption 0
5-02(30) Common stock 1,809,171
5-02(31) Other stockholders' equity 12,613,679
5-02(32) Total liabilities and stockholders
equity 27,883,760
5-03(b)1(a) Net sales of tangible products 32,416,882
5-03(b)1 Total revenues 32,416,882
5-03(b)2(a) Cost of tangible goods sold 28,606,839
5-03(b)2 Total costs and expenses applicable
to sales and revenues 28,606,839
5-03(b)3 Other costs and expenses 0
5-03(b)5 Provision for doubtful accounts
and notes 0
5-03(b)(8) Interest and amortization of debt
discount 315,659
5-03(b)(10) Income before taxes and other items 305,620
5-03(b)(11) Income tax expense 111,592
5-03(b)(14) Income/loss continuing operations 194,028
5-03(b)(15) Discontinued operations 0
5-03(b)(17) Extraordinary items 0
5-03(b)(18) Cumulative effect - changes in
accounting principles 0
5-03(b)(19) Net income or loss 194,028
5-03(b)(20) Earnings per share - primary $.07
5-03(b)(20) Earnings per share - fully diluted $.07
Page 19
BURKE MILLS, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
BURKE MILLS, INC.
(Registrant)
November 15, 1999 By: Charles P. McCamy /s
Date: ______________________ ________________________
Charles P. McCamy
(President)
November 15, 1999 By: Thomas I. Nail /s
Date: ______________________ _________________________
Thomas I. Nail
(Vice President Finance)
(Principal Accounting Officer)
(Principal Financial Officer)
Page 20
End